Whirlpool (NYSE:WHR) Q2 2020 Earnings Call

0:01 Good morning and welcome to Whirlpool Corporation's second quarter 2020 earnings release call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Senior Director of Investor Relations, Roxanne

0:16 Warner. Thank you and welcome to our second quarter 2020 conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer, and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available on the investor section of our website at woolpoolcorp.com. Before we begin, I remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10Q and other periodic reports. We also want to remind you that today's presentation includes non-GAAP measures.

1:05 We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations. We also think the adjusted measures will provide you a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the supplemental information package posted on the investor relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. Also, as we highlight on slide two, there is significant uncertainty about the duration and potential impact of the COVID-19 pandemic. Therefore, our discussion of the potential impact of COVID-19 on the company's business results reflects our best estimate based on what we know today.

1:59 At this time, all participants are in a listen-only mode. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we ask that participants ask no more than two questions. With that, I'll turn the call over to Marc.

2:18 Thanks, Roxanne, and good morning, everyone. I hope you and your families are staying healthy and safe during these times. Before I begin, I want to acknowledge the hard work of all our employees throughout this year. I'm extremely proud of their unwavering dedication and commitment to Wopool and our customers through these difficult times. Now turning to slide four, we discuss our second quarter 2020 highlights. We delivered resilient results globally with ongoing earnings per diluted share of $2.15, an ongoing EBIT margin of 5.2%. despite significant and continued COVID-19 related challenges. In North America, we delivered a very strong performance of 12.6% EBIT margins, an expansion of 20 base points, and a clear indication of a region's strength and agility.

3:12 Across the globe, we took decisive and meaningful actions, driving strong levels of cost takeout. Lastly, we delivered the over year free cash flow improvement of $124 million Due to strong working capital management, particularly in accounts receivable and inventory. Turning to slide 5, we show the drivers of our second quarter EBIT margins. Price mix negatively impacted margins by 75 basis points as unfavorable product mix shifts due to COVID-19 related consumer purchases were partially offset by effective promotion management in North America. Our cost takeout actions delivered approximately 150 basis points of margin expansion, partially offsetting a 300 basis point headwind from lower fixed cost absorption driven by COVID-19 production disruptions and inventory reduction.

4:06 Additionally, continued favorable raw material trends positively benefited margins by approximately 100 basis points. Lastly, strong cost discipline related to marketing and technology investments partially offset the unfavorable impact of currency, primarily in our Latin America region. Overall, we are very pleased to deliver solid operating margins in what was undoubtedly the most difficult quarter of a global pandemic. This impressively demonstrates the strong execution of our global teams and resiliency of our business model. And now I'll turn it over to Jim to review our regional results.

4:45 Thanks, Marc. And good morning, everyone. Turning to slide seven, I'll review our second quarter regional results. In North America, COVID-related demand and operational disruptions resulted in double-digit revenue decline, with solid recovery in June as restrictions eased across most states. This year-over-year revenue decline of approximately 13% is comparably better than other regions due to home improvement channels remaining open. Despite lower demand, we delivered EBIT margins of 12.6% in the quarter due to strong cost discipline and reduced marketing investments. From an operational standpoint, we continue to experience supply disruptions due to reduced production yield in U.S. factories and component shortages out of Mexico.

5:34 Overall, we are pleased with the continued strength of our North America business and the region's ability to maintain strong margins in a challenging environment. Turning to slide eight, I'll review our second quarter results for Europe, Middle East, and Africa region. Shutdowns across Europe in April and May and significant demand weakness across the region drove our negative second quarter results. However, in June, year over year volume growth in all countries except Russia, driven by strong demand recovery and share gains in key countries, resulted in year over year net sales growth and positive EBIT in the month. Looking forward, a strong order pipeline extending into Q3 combined with our ongoing improvement efforts provide us confidence the region will return to profitability in the back half of the year. Turning to slide 9, I'll review our second quarter results for our Latin America region. Demand declined strongly throughout the quarter in Mexico and through May in Brazil, with June showing strong signs of recovery.

6:37 Organic net sales declined approximately 4% as share gains across the region and strong direct-to-consumer sales partially offset demand declines. The region delivered positive EBIT margin as strong cost takeout mitigated COVID-related disruptions and continued currency devaluation. Finally, as a reminder, our second quarter 2019 results include the impact of the Embraer compressor business in Latin America's results. This will be the final quarter in which comparison periods will contain imbraco results. Turning to slide 10, I'll review our second quarter results for the Asia region. While net sales were significantly impacted by the India shutdowns in April and May, demand rebounded across Asia in June. EBIT declined as cost takeout was offset by significant COVID related demand challenges.

7:30 In China, the macroeconomic environment has become increasingly stable, though a level of uncertainty remains as we move through the second half of the year. Operationally, we are pleased to have delivered Whirlpool-branded share growth in the quarter. In India, results strongly improved sequentially within the quarter as economic restrictions eased. Overall, we are pleased with our ongoing EBIT margin results of 5.2%, given the approximately 300 basis point impact from COVID-19. These results in our operational strategy and demonstrate the resiliency of our global business. Turning to slide 12, Marc and I will discuss our updated perspective on 2020. I will now turn it over to Marc to begin.

8:15 Thanks, Jim. As expected, the second quarter was the most difficult one in terms of the impact of a pandemic on our business. While we are encouraged by the demand trend seen in June and extending into Q3, We are very mindful of the significant uncertainties which remain for the rest of the year. Because of this, we are not reinstating folio guidance, but again want to provide our current perspective based on the information available at this time. In line with our discussions during the last earnings call, I want to give you an update on the three fundamental questions for our business in 2020. 1. What's the shape of recovery? Based on our current sell-through trends in key countries, we continue to expect a U-shaped recovery throughout 2020.

9:02 However, there is a risk for a W-shaped demand curve in particular as we look into Q4. Overall, we anticipate a fully organic net sales decline of 7% to 12%, an improvement from our previous full-year perspective of 10% to 15% due to a stronger-than-expected second quarter net sales. Second, can we sustain our operating margins? Here, I will highlight the clear structural improvement in our margin profile compared to our business results during the 2008 financial crisis and why that provides us confidence in our ability to sustain healthy operating margins going forward. Additionally, we can confirm we are firmly on track to deliver cost savings of $500 million or more in 2020. Third, what's our liquidity position?

9:51 Finally, Jim will discuss our strong cash position supported by a clear focus on disciplined working capital management and our enhanced liquidity position which enables us to withstand the current economic uncertainty we face across the globe. Turning to slide 13, I'll highlight the updated data that continues to support our perspective of the U-shaped recovery throughout 2020. However, please note that we do not intend to share this data beyond this quarter, but we felt, given the uncertainty of the current situation, and this data will provide valuable proof points as we all assess the impact of COVID-19. As we continue to monitor the development of COVID-19 cases and its related impact on appliance demand across key countries, we continue to see similar U-shaped demand patterns emerge, albeit on different timelines.

10:43 In China, COVID-19 cases have significantly reduced even as a broad economy reopens, leading to a pickup in demand both with a notable shift from offline to online. In Italy and the UK, we are seeing clear signs of recovery in June as COVID-19 cases reduce and economies begin to reopen. We believe this has pent up demand from the previous lockdowns and it remains to be seen if it is yet a structural recovery. In the US, we have not seen the level of demand decline as we have experienced in other countries. This is the result of key retailers remaining open throughout the pandemic and the impact of government cash transfers to consumers. Based on the consistent demand trends we are seeing across many of our key countries, each at different phases of a crisis, we continue to expect a U-shape to recover, resulting in a full year 2020 organic net sales decline of 7 to 12%.

11:39 Turning to slide 14, I discussed our structurally improved margin position. During our last earnings call, we highlighted our margin profile during the last financial crisis. In 2008, we saw EBIT margins drop sharply to around 3.5% before bottoming out at a negative 1%. Contrast this with our second quarter results in which we delivered ongoing EBIT margins above 5% in what is the trust period of a current COVID-related crisis. These results provide a meaningful proof point indicating that we can sustain healthy margins throughout this crisis and demonstrate the effectiveness of a strong and decisive actions we've taken. Turning to slide 15, I'll discuss the actions put in place to sustain our margins over the near term in more detail.

12:25 Overall, we're well on track towards delivering cost takeout of $500 million or more as part of our COVID-19 response plan. Year to date, we have delivered cost takeout of approximately $180 million with actions in place to realize the remainder of the savings in the second half of the year. First, we continue to focus on ensuring we capitalize on the deflationary raw material market. Second, we continue to significantly reduce both structural and discretionary spending. During the quarter, we took the initial steps to implement a large majority of the actions we outlined on our Q1 call. As of today, these actions are 80% completed, and as a result, we expect to see cost savings resulting from these measures accelerate throughout the second half of the year.

13:12 We have maintained our strict focus on working capital management, ensuring we have the proper risk mitigation plans in place and are appropriately managing our inventory levels across the globe. Finally, we recently announced a workforce reduction plan in the U.S. as part of our continued cost reduction efforts. Inclusive of our U.S. actions, NAPA's restructuring charges and anticipated additional actions, we now expect total restructuring charges of $260 million to $280 million for 2020. Above our original guidance of $100 million. Moving to slide 16, I now turn it over to Jim to highlight our overall financial position and ability to navigate and ultimately lead out of this crisis. Thanks, Marc.

13:56 As a result of continued efforts to support our overall liquidity needs, our financial position remains strong, with ample liquidity and flexibility to withstand the current economic uncertainty. First, we have a very strong liquidity position as evidenced by our current cash position of $2.5 billion, with approximately $2.5 billion available in remaining committed credit facilities. Within the quarter, we executed a $500 million 364-day revolving credit facility and issued a $500 million 30-year bond, adding $1 billion of additional liquidity. Subsequently, we used the proceeds from the bond and new credit facility to pay down $1 billion of short-term borrowings under our long-term committed credit facility, maintaining our leveraged position compared to the first quarter.

14:48 Second, we continue to maintain ample buffer to withstand increased debt or a reduction in earnings without negatively impacting our covenants. From a covenant perspective, our debt to capitalization limit is 0.65, and we are currently at approximately 0.5. while our interest coverage ratio requires a minimum of three times and we are currently above 10 times. Third, I'd like to remind everyone that we have no additional bond maturities until the second quarter of 2021, which is only approximately $300 million. It is through our strong financial position and our continued actions that we strive to maintain our strong investment grade credit rating. Lastly, I'd like to mention that our revised capital allocation plan remains unchanged at this time. Until our future liquidity needs become clear, our temporary suspension of share repurchases will remain in effect.

15:41 Overall, we are confident that we have the liquidity needed to support our operations during this crisis and remain focused on progressing towards our long-term gross debt to EBITDA goal of two times. Now on slide 17, I'll turn it back over to Marc to summarize our key messages.

15:58 Thanks, Jim. Our second quarter performance demonstrated resiliency of our business model and highlighted the strong execution of our global teams as we delivered healthy operating margins in what we believe is undoubtedly the trough period of a COVID crisis. The decisive actions we took mitigated significant volume loss across the globe and helped ensure we continue to sustain strong margins in the future. Additionally, we continue to maintain a very strong liquidity position and remain firmly committed to driving our business towards our leverage goal of 2x over the long term. As we continue to invest in our operational priorities and digital transformation journey, we are positioning ourselves to win in the eventual economic recovery.

16:43 These continued investments and a resilient year-to-date performance give us confidence in our ability to drive long-term value for our shareholders. and now we will end our formal remarks and open it up for questions. Certainly. At this time, if you'd like to ask a question, please press star 1 on your telephone keypad. Susan McClary with Goldman Sachs, your line is open.

17:07 Thank you. Good morning and well done for the quarter, guys.

17:11 Thank you.

17:13 My first question is just, you know, Marc, you mentioned that you are 80% done with the cost actions that you plan to take. Can you maybe give us a bit more color on how much of that is structural versus discretionary and maybe how we should be thinking about it rolling through as we think about the margin trajectory, especially maybe going into

17:33 2021? Yes, Susan. And I would particularly like to refer to what is page 26 in the slide presentation because that breaks down exactly what you asked for. So first of all, we are very confident on our 500 million total cost takeout for 2020. And as we said in our prepared remarks, 500 or more, of which 150 is roughly raw material. I wouldn't call that structural. And of the remaining 350, there is about 100 million which are non-structural, like furloughs or travel expense reduction. But there's 250 million structural actions, which we largely implemented in the second quarter, that's what the 80% refers to, which of course will have an impact, at some impact already in Q2, but the large impact is in the second half.

18:27 There will be by definition, just that's the fact of the calendar year, yes, there's a carryover impact of a structural action into 21, but keep in mind that also next year we're running a comparison of a non-structural action, so you mitigate some of that. So yes, there's a carryover impact of a structural action, which probably in the ballpark of 50 to 100 million carried over into 21.

18:50 Okay that's helpful thank you and then you know given some of the movements we saw this quarter especially as it relates to COVID it seems like maybe there was some shift in market share that happened can you just talk a little bit to that and kind of give us some sense of how you expect that to trend as we've now Emerge from the real key parts of COVID and are getting to perhaps a more stable operating environment.

19:16 Susan, are you referring to North America or globally?

19:19 Yes, I'm sorry, North America.

19:21 In North America, and as we also highlighted in our remarks, we saw in particular, first of all throughout the entire quarter, the demand impact was less pronounced than any other market around the world. That's just a result of Key channels remaining open and frankly also with consumers benefiting from a government stimulus program with having cash available. So combination of relatively solid demand and stores remaining open led to probably less of a severe impact in the second quarter than other markets. With that in mind, even though we kept our factories running through the entire second quarter, the COVID impact on the supply chain is irrelevant. It comes back to social distancing in the factories, How you prepare factories for it. You could have had a temporary shutdown of factories because of flare-ups. And we also had component challenges coming out of Mexico.

20:14 With that in mind, and particularly the last six weeks of a quarter, we were supply constrained. And that led to a market share loss over the last six weeks in North America. We are in our way of working through that and out of it, but I also want to be mindful of As long as COVID is around us, there is a certain risk to the supply chain. We work on the existing challenges and we're confident we will get them behind us, but the risk remains throughout the rest of the year as long as COVID is around us. Curtis Mangle with Bank of America. Your line is open.

20:56 Good morning. Thanks very much for taking my questions. So, Jim, a question for you. If we could break out the $118 million in costs taken out related to restructuring, how much of it was that attributable to COVID-19, and how much would you bucket to North America? And maybe just could you give a little bit more detail in terms of, you know, what exactly these costs were attributable to and to North America? I believe what you're talking about is the incremental restructuring cost that we added on and obviously

21:50 This is significantly related to the downturn in volume that we had, which is a one-time type of event in terms of a pandemic and the need to reduce our cost structure at a higher level than we had originally anticipated. I mean, if you want to think about that, it kind of happens pretty rateably across the globe as you look at it, because this is the portion, the initial $100 million was the restructuring we were doing mainly within EMEA around the closure of the Naples factory and a few other things. These incremental actions are being implemented across the globe almost in an equal amount about where our revenues are. Most of these are, the majority of these are people costs, and that's just the reduction that you see. We did a couple different things here. One, we ran a discretionary early retirement program within the U.S.

22:38 Then additionally, we had some involuntary layoffs that we also did throughout the process. So using both of those tools, those are what add up to most of those costs there. And as I said, you just got to think about it. It's pretty even across the globe because we've taken actions everywhere to bring our business in line with the volume that we see for this year and the potential risks we see going forward.

23:02 Oh, okay. Understood. Maybe just a quick one, kind of shifting back to the U.S. and the promotional environment. As I understand it, it was Pretty subdued, I think kind of similar to what you saw in 1Q for obvious reasons in terms of low overall demand. Do you think there are any risks kind of going forward as the operational and kind of demand environment normalizes? You could see a pickup in promotional intensity or competition from some of your competitors?

23:33 Curtis, it's Marc. As you know, we're not making forward-looking statements on promotion, promotion environment, and I don't know what competitors will be doing. I would say the Q2 promotion environment is insofar unusual because at least for our case we decided there's no point in promoting products which you don't have available to some extent and that's why Q2 was subdued. Plus in addition you had a very peculiar demand situation with the drive towards freezers, fridges, etc. So nothing in Q2 was normal in that respect. Q3, keep in mind there will be supply constraints also throughout Q3, so I'm not quite sure I would take a broader promotion environment Q3 as representative of a normalized market environment.

24:21 Eric Bosshard with Cleveland Research. Your line is open.

24:27 Good morning. Thank you. Good morning, Eric. On the revenue side, it sounds like the adjustments of the full year you attributed previously exclusively to the 2Q better than expectations. Am I saying that right, that you haven't had a different view on the second half revenue outlook from what you had said previously? And I guess the follow-up within that is why not?

24:50 Eric, fundamentally, yes, the numbers are similar to what we laid out before, and Q2 came in stronger. The color I want to provide in addition, and we alluded to this one in the prepared remarks, we feel very good about July and August. So July and August remains as strong as June, but we are cautious about what happens September, December. There's just too much uncertainty in the form of what happens once the government stimulus papers off. We don't know how people react to COVID and consumer demand. We don't know how unemployment will be dealt with and how it impacts consumer demand. So in a certain way, yes, we factored in that caution in our second half outlook. If it doesn't materialize, yes, then it will be better.

25:37 The good news is July and August, it actually looks pretty good.

25:43 And then I guess related to that, in terms of your supply chain, and I'm sure the whole industry has got supply chain limitations, but in terms of your supply chain limitations to participate in better industry demand, are you now at the point where you're running full speed and you can do what others are doing in the industry? or at what point will you be able to be fully participating in the industry recovery that's taking place?

26:08 So Eric, first of all, we never shut down our factories and I'm talking about the U.S. factories, so of course every part of the world is slightly different. What you fundamentally need to understand when you make a factory COVID safe or as safe as you can do, because of social distancing, because of operating in the factories, because you physically have to extend the line spacing on an assembly line, etc. Because of risk which you have with flaring up of case in certain locations and frankly also higher absenteeism which we're experiencing right now, you can never, even if you run the factory, you can't run it at 100% capacity. That's a simple reality of COVID. In addition, the Mexican components which are delivered into our U.S.

26:55 factory, we had some challenges because the The Mexico situation is insofar even more complicated because of the decision about if a factory can operate or not is delegated to the states of Mexico and delegated to individual health inspectors. And that drove just a lot of stop and goes. As you said before, it's not only impacting us, I would assume it impacts the entire industry. But these are the two fundamental elements in this one. So as I said before, we are right now working through the known issues and it's getting better. But again, based on what we've seen in the second quarter, we should expect in Q3 and Q4 we may face similar issues, and we will have to manage them down.

27:37 Yeah, and maybe, Eric, I'd add to that and just say that, you know, as each week goes by, we see improvements in our ability and in our suppliers' ability to meet the demand. But to Marc's point that there also is just a, you know, backlog of orders that we work through throughout the upcoming quarters, and we know many of our competitors are in the same situation. So, you know, it is improving, but, you know, we are still catching up to where the demand has been. Michael Rehan with J.P. Morgan, your line is open.

28:11 Hi, good morning, and congrats on the results in a tough environment. First question I had was on mix. Obviously, kind of a headwind for you guys this quarter, despite being partially upset by the reduction in promotions, which makes sense in the backdrop in the second quarter. How are you thinking about mix in the back half, particularly in North America, as you kind of referenced last quarter that some of the purchases initially of that real lower end perhaps helped by stimulus checks or getting second freezers or such.

28:58 How have you seen mix change throughout the quarter and how does that influence you thinking about the back half?

29:04 Michael, so as we referred to earlier, our price mix over quarter was negative 75 base points. The important thing is, and that probably partially answers your question is, That negative was in particular in April and May and got a lot better in June or late May and late June. And what you see in there is the heavy down mix from a product mix was in particular the beginning of COVID. And then we saw a very significant amount of low-end refrigerators, microwaves, etc. And that mix gradually is getting better as long as the pandemic remains. Now people rediscovered it. The ovens, the cookers, I mean, they just spend time in the kitchen and there's cash available with consumers.

29:49 So that ultimately now starts driving better mix. In addition, we have just less promotional investments. So that's why the June mix was certainly better than the negative 75 base points, which we saw for our entire quarter. And that's probably the June one is probably more reflective of what we might expect going forwards.

30:11 I appreciate that Marc and you know if there's any way to talk about maybe mix turning flat or positive as part of that I'd appreciate it but you know second question on you know cost cadence obviously remaining on track there is very encouraging a big part of the margin story how should we think about the second half you know in terms of 3Q, 4Q you talked about you know Previously, you said $70 million. Maybe it was a little more in the first quarter, $100 million in the second, or $180 combined. How should that, you know, break out, 3Q, 4Q?

30:51 Yeah. So, you know, Mike, if you think about it this way, that leaves about $320 remaining for the rest of the year in the $500. And materials is pretty rateable throughout the year at about 100 basis points a quarter. So you can think about that's approximately maybe $70 to $80 million. in the back half of the year, which leaves another $250 million of our net cost takeout that comes within this time. And as the cost actions begin to ramp up, you could probably think about that as 40% of that maybe coming in Q3, and then 60% of that remaining amount coming in Q4 would be the logical seasonality of how all these actions build. So I think that's the best way to think about it. Sam Darkash with Raymond James. Your line is open.

31:38 Good morning, Marc. Good morning, Jim. I hope you both are well.

31:42 Same to you, Sam. Good morning.

31:45 My two questions. First, seasonally, typically, Whirlpool generates all its cash flow in the back half. Knowing that you're expecting second half sales down somewhere in that 4% to 14% range, are you anticipating free cash flow positive for the year? knowing that you're, I think, $900 million in the hole as we stand after the second quarter?

32:12 Yes, Sam. You know, here's what I would say is we're definitely expecting positive free cash flow within the year. And if you even look at where we are in terms of our cash usage right now compared to prior years and compared to last year, we're almost $100 million better than we were last year at this point in time. We feel very good about where our working capital levels are from a cash flow perspective. Obviously, Our inventories have come down as we've sold a lot of product out of our inventories, but our receivables are a little bit lower and our payables are significantly lower because of the lower production volumes. So we do expect the same seasonality of cash that we see in a normal year. And as sales pick up throughout the fourth quarter, we do expect to collect more cash. and the other thing I'd probably add in within there is you'll also see in the back half of the year more of the benefit of some of the capital projects we've been delaying as you look out throughout the year. We won't have as much outflow due to capital expenditures in the back half. Sam, maybe just the only additional comment.

33:12 So yes, we're very pleased with how we managed to cash flow the second quarter given everything else. Despite the enormous seasonality Don't do my mistake of just adding that improvement to the full year number of next last year. And the reason why I'm saying this one is we're working capital in particularly inventory moves, which as you know, impact cash flow are very unusual. We have the highest amount of inventory reduction ever in the second quarter. And when you rebuild inventory, you basically negatively impact your working capital and that has a certain cash drain. So there's a little bit of rebalancing around the inventories. I do expect this to be completed before year end, so we should more or less get back to a normal situation. But we absolutely do expect a positive cash flow, and we're firmly on track on this one.

34:01 My second question revolves around U.S. retailer inventories and their status. Obviously, demand sell-through was really uneven and worsened Thank you very much.

34:43 have impacted the entire industry to some extent, or to a large extent, and as such also the retailers. So keep also in mind the starting point is not every retailer has inventory, may have different amount of inventories, but across the board the inventory levels in the U.S. trade is low. Adam Baumgarten with Credit Suisse, your line is open. Hi, this is actually Marius for Adam. Just a quick question on the restructuring costs. You did mention that most of the costs are in North America, and we're just wondering if the remaining of the costs that are going to come in the second half are going to be mostly in North America as well?

35:31 Well, as we said, actually the first $100 million were primarily in EMEA, and then if you take The additional 180 in the back half of the year or the ones that we added, we said that that's about rateable across the globe. So, you know, you could assume it's close to 50% of that approximately falls within the North America business just based on what I said earlier. All right. And do you expect most of that to come in the third quarter?

35:59 I would say we expect it to come throughout the third and the fourth quarter, and we haven't really given a split on that because many of those actions, depending on the timing of execution and the accounting rules around how you recognize it, it'll come either in the third or the fourth quarter. But we did add an incremental amount here in the second quarter also that we've already taken the charge for. David McGregor with Longbow Research. Your line is open.

36:28 Good morning, everyone. Congratulations, Marc. Nice job this quarter and through a really difficult environment. I guess I talked a lot about North America. Let's talk about Europe and encouraging to hear that you were profitable in June. You were profitable in the fourth quarter before this whole mess kind of got underway. It sounds from your comments as though you're feeling good about your ability to be profitable there in the second half. I guess I want to as a consequence of those comments maybe go back a year to your analyst day where you talked about kind of the expectations for restoring profitability to European business and the thought that once you could you know get out of Turkey and get the fixed cost reductions and you know regain some of the volume that sort of the first stop on the journey to that longer term goal was kind of three to four percent margins so I guess I'd love to get your thoughts in terms of based on kind of now getting back, re-established with some of these key retailers and getting your balance of trade back up, getting your mix moving in the right direction.

37:33 How patient should we be thinking about needing to be to see at least three to four percent kind of progress towards that longer term goal?

37:42 Yes, so David on Durban, particularly if you refer to a year ago, as you recall in last year Q3 and Q4 we finally saw the European numbers starting to come around and we were also encouraged by what we saw certainly before COVID until pretty much February. Now we all know two and a half quarters don't make a trend yet so but it was of course frustrating that just then we kind of had the quarter trending in the right way that COVID hit. COVID hit Europe in a very hard way, similar to what we've seen in India or other markets, and a lot stronger than in North America and Brazil, because essentially you had entire countries and retailers shut down. So the April-May was devastating, frankly, from a bottom line, because you had very limited revenues and you had the fixed costs, despite what you did on costs.

38:33 So April-May was way worse than you see here in the entire quarterly results. June was solid, and in terms of being profitable, not just above break-even, but really profitable. We had solid demand. And July-August also looked good, and frankly, that's why Jim said earlier, we will make a profit in Q3, and subsequently also Q4. A few questions about when do we see the 3 or 4 percent. We haven't yet given guidance for 21. 21 will be a milestone towards these numbers, but maybe not yet fully to these numbers. But we you know we in a certain way also as we factor in 21 in the year-over-year comparison then we mentally need to take off the COVID impact out and knowing that we were on a reasonable run rate that's what we expect to continue to 21.

39:22 Okay second question let me just talk about the builder channel in the North American market and you know we're seeing a lot of positive indicators around residential construction and residential demand You built a nice business there over the past few years. I guess you've been able to gain share through that channel. Could you just remind us around the parameters of that business, the size of that business, the profitability, how we should be thinking about the potential contribution from your builder business into the second half of this year?

39:57 So, David, of course, we can spend a lot of time talking about the builder business. It is a peculiar channel, as you well know, and I'm talking about both the national builders and the smaller builders which go through the home improvement channel. In particular, the national builders, these are typically multi-year contracts which are either exclusive with us or they kind of focus on maximum two suppliers. So these are long-running contracts which technically on the kind of purely gross margin are a little bit lower, but because the costs to serve are a little bit lower, they're a good channel for us and a profitable channel for us. And they bring a certain continuity and a very good effect. Now, on the builders, as you know, there was a little bit, I would say, slowdown, not surprisingly, in February, March, April, but I think the momentum which we've seen on the builder side coming out of May and June and now for the rest of the year was very strong.

40:53 and so when I refer to cautious optimistic about the rest of a business on builders I am optimistic because a combination of low mortgage rates still an undersupplied markets and the broader nesting trend which we see across consumers I think spells good news for the builder channel which in which we are very well positioned as you model the impact of this one keep always in mind We're at the very tail end of a value chain of a builder. What I mean with that, the appliances are the last thing typically which goes into the house. So between a housing start and us seeing the revenues of the appliance, there is typically six to nine months. But anyhow, I would call it that's very good news down the road. Ken Ziener with E-Bank. Your line is open.

41:44 Good morning, everybody.

41:45 Good morning, Ken.

41:48 Wow. We're going to talk about North America and then just want to go into EMEA for my second question. But the North American supply chain issues, can you talk about how much that might have related to it? I don't want to say sales shortfall, but considering your volumes were down, it sounds like you might have had more if not for the supply chain issue, your margins were up. and your North American business, you guys obviously believe it's very solid. I think your pricing discipline within a fair competitive environment is affirmed generally and certainly by this quarter. So can you talk about the sales shortfall, how the margins were so good and the conviction you're having around July and August in terms of backlog?

42:39 Was it like a 5% shortfall on these supply chain issues? and why is that not necessarily impacting margins? Is pricing actually good if the industry is in kind of short supply? I'm just trying to put these, you know, the shortfall in context.

42:59 So, Ken, first of all, I like your quote of wow because I think our North American numbers are very impressive by any definition and are just testimony of a strong business model and strong execution of that team spirit. Now, specifically to your question about the supply constraint, keep in mind that impacted particularly the back half of the quarter. So you had demand declines across the board in April, May, and then in June, when the demand was starting to recover, we were faced with some supply constraints. So I would say of entire North America, revenue dropped, which you saw was around 12 or 13%, A few percentage points were related to supply, but certainly less than half. There was an industry demand which was just slowed down in April, May.

43:47 But for June, one was hampered. So yes, we could have had seen even, quote unquote, a better revenue without wage constraints. On the margin side, and again, that's testimony to a very strong execution. It is a combination of decisive and strong cost measures taken throughout the quarter, not only on the cost which we talked about, but also on demand. RevGen, and travel expenses, all the things that were a very strong discipline in how we manage our costs. And then as we saw the supply constraints, a good response in terms of the promotional strategy, which we basically had to turn, put that all together, that led to very strong margins. And I think in the past, not necessarily by you, but a lot of people always ask, so yeah, we see now the peak margins, but what are the trough margins?

44:37 If you have a North American business with a tough margin of 12.6%, I think it answers a lot of questions.

44:43 Yeah, just to kind of highlight what Marc had said there and add a little bit, I think a lot of the structural changes we've made over the years to his point have really put that business in a good position to be able to deal with situations like this and especially the way we manage fixed costs over the years.

45:02 Yeah, I mean, it's just... Amazing that you're up year over year on margins. So my second question, I guess actually I want to expand on the first, but you did confirm that email, you expected it to be profitable in the second half is what I believe, so just so I don't misunderstand that. And given that type of commentary for Europe, with margins up year over year, albeit only 20 basis points in 2Q, is it reasonable to assume that cost savings, etc., You know, margins in North America, is it realistic that that will still have a 12% EBIT handle on it? I mean, there's obviously a big range there considering last year was 12.7. So do you think this year's EBIT in North America will still have a 12% handle on it?

45:54 As you know, we don't give quarterly guidance and particularly not regional quarterly guidance. Having said that, so just to reconfirm, yes, we said... we expect Europe to be profitable not only SECNAV but Q3 and Q4 so you will have as such in Europe a positive margin lift and also you know North America with all these kind of revenue down 12.6 in Q2 we would also expect a solid performance or strong performance in Q3 and Q4 to be a little bit more specific and again I'm we're not going to give a quarterly guidance but I think you heard before, we feel very good about July and August. Our July and August company margins will be very good. We're just not yet certain about what it all means for September, October, November, December with macro-certainties still around us. But short-term horizon, we're very bullish.

46:48 And Ken, maybe to add on the EMEA piece, the reason we have confidence in the back half of the year is April and May were the biggest declines when you look at the down 20% revenues. and as Marc said, the order pipeline or the orders in June and then order pipeline early in Q3 has been very strong. Additionally, the cost actions that we are taking there just due to the amount of time it takes to implement come more in the back half of the year. So that's why we feel confident in Q3 we'll begin to show a profit again. Dalvin Clark with Deutsche Bank. Your line is open.

47:23 Hey, good morning. Thanks for the question. So you mentioned back half guidance being basically unchanged from a top line perspective. And I understand the uncertainty here. But just given the stronger than expected top line trends in the second quarter, how are you now thinking about underlying decremental margins, you know, either in the back half or for the full year?

47:44 Yeah, well, what I would say is, you know, seldom as you look out throughout the back half of the year, and we begin to see demand We've always said that, again, incremental volume has about a 20% impact on it. Now, you can kind of take that and assume that that's the impact of the volume down, but as we said, our cost savings are more than offsetting a lot of that in the back half of the year as we look at it, and I think that's the key thing to think about there when we talked about the seasonality of the cost savings earlier. Again, we think the back half of the year will not have as significant of an impact as obviously the second quarter did, but nothing's changed from our assumptions around how you should look at that.

48:27 Okay, so still the same framework to the full year number that you provided on the last call. Okay. And then so I guess if you look at the breakdown of your $500 million cost takeout, about half of it is structural costs. and so if things start to normalize next year as it relates to COVID, people can travel again and raw material costs and I know you're not giving 2021 guidance but under that scenario where those items do normalize, how should we think about the margin profile of the business beyond 2020? Is there anything you've learned in terms of some of these non-structural actions or discretionary cost takeouts that that could potentially be more structural? Or is it fair to say at this point that 50% of this 500 million could potentially reverse in a more normalized environment?

49:26 So just how do we think about the margin profile in that scenario?

49:32 It's maybe, I guess it's the nature of non-structural actions that we don't expect them to fully repeat next year. And what I was referring to, furloughs, et cetera, we don't expect that will happen again. Travel expenses will come back, to your point, maybe not to a full extent as we've seen in prior years because people will have probably different behaviors. So yes, we're not counting on a repeat of 100 million. Might we be creative in terms of developing ideas which comes out of that experience for next year? Yeah, we could be, but that will then at one point be just part of our structural cost actions. Structural cost actions were one which also to some extent, to a large extent, are behind these restructuring actions, yes, we do expect to carry over.

50:17 And that ultimately will provide us with a better structural cost position as a company. So yes, for next year, in a certain way, we expect a better revenue line, maybe not fully back to the 19 levels, hitting a structurally better cost structure.

50:35 Yeah, I think maybe the other thing to learnings that I would add to that is The agility that we've had is we've had to deal with swift volume and revenue declines in dealing with our discretionary cost base. I think demonstrates that in times when the investment will provide a return, we'll continue to make it. And in times when we need to pull some of that back in because the return is not there, we have the ability to adjust it. So while some of these are non-structural, they are things we have control over. And I think we've demonstrated our ability to quickly react and control those costs. Mike Dahl with RBC Capital Markets. Your line is open.

51:15 Good morning. Thanks for taking my questions and a lot of helpful callers so far. Just back on the North American supply chain dynamics, helpful outlining some of the revenue side. I think if we look at the margin bridge that went into part of what was a 300 basis point headwind. which was partially offset by the cost actions. As we think about that split of the margin dynamic in 2Q, Marc, how much was directly related to the production yields and some of the other supply chain issues that is still going to carry forward in the second half?

52:05 So, Mike, I think as you look at that 300 basis point this is Jim as you look at that 300 basis point you know impact that we had a big portion of that is due to the the reduced production levels due to safety requirements we had to put in due to supplier issues all the thing that Marc talked about before I think to put it in context the easiest way to think about it look at our inventory numbers and the trends in our inventory numbers and typically in q1 and q2 we build inventory as we head into our prime season but as we had supply constraints, we were actually reducing our inventory levels by about 400 million in the second quarter and on a year-over-year basis, it's about a $500 million difference. So that's what causes that significant impact and as you build inventory back to normal, that begins to wash out.

52:55 Got it. Okay, thanks, Jim. And then just a second question, a quick follow-up on the on the, again, kind of North American and sell out versus sell in. It still sounds like despite some of those constraints, you may have still seen a bit better sell in than those sell out trends on the graph shown in the slide deck in the U.S., but just wanted to kind of clarify whether or not there were, when we're looking at specifically to the last four or five weeks of the quarter, whether your sell-in trends were better than those sell-out charts would suggest.

53:44 No, Mike, actually, I'd probably say it's about the opposite. And it's mainly because what Mark talked about earlier, one, with the supply constraints that we had, Retailers, their inventory levels actually were going down as their sellout increased and our sell-in to them was below what they were selling out. So if anything, right now we also talked about that we have a significant number of orders that we're working through to provide to our customers that's in excess of the normal backlog we might have. So if anything, I do believe sellout was stronger than sell-in within the quarter. And that's why we also believe and we're confident in the demand we're seeing here in July and August and the amount of orders we're seeing.

54:26 So let me maybe wrap up here and wrapping up the Q&A. First of all, I thank you all for joining. I think you heard us today talking about, of course, our business was impacted by the pandemic as expected. but I think you got all the sense we're actually proud of how our company, how our people manage through this crisis and we're proud about the kind of margins which we were delivering despite this strong impact from pandemic. I think this Q2 positions us very well for the back half both in terms of what we've done on the cost actions and what we've done on managing the business in a more agile manner We're very well positioned, but you also heard we're a little bit cautious still what happens September to December. And that's just prudence which should develop as you go through this crisis.

55:14 But I feel very good about how our company is positioned today and how we're looking at the rest of the year. And I'm looking forward to talk to you in our next earnings call. So stay safe and healthy. Thanks a lot. This concludes the Whirlpool Corporation's second quarter 2020 earnings release call. We thank you for your participation. You may now disconnect.